Will Platts Pop Alberta’s “Bitumen Bubble”?

Platts, a global company with a remarkably flaccid name, finds itself smack in the middle of an international price fixing scandal and I really hope the Alberta government is paying attention! 

Last week the European Commission storm troopers, sorry, inspectors, raided the offices of BP, Shell and Statoil, three of the most significant oil companies on the planet, to find out whether they colluded to manipulate oil prices by reporting false information to Platts, the most powerful price reporting agency on the planet, in a conspiracy to manipulate trade in North Sea Brent oil.

Platts was in “lock down” as EC inspectors seized laptops and files in what has been described as “the biggest trading probe since the Libor scandal”.*

What is Platts?   

Platts was founded by Warren C Platt in 1909 to provide market-based price information to the oil industry.  Over the years it grew to include coal, natural gas, electricity, nuclear energy and the renewables sectors.

The benchmark prices for crude oil, refined oil products and natural gas are set at 4 pm each day.  Platts opens a 30 minute “window” to collect data—bids, offers and trades—from 240 companies, analyzes this data for 90 minutes (these guys are uber-smart!) and spits out the daily benchmark prices for the relevant commodity.  These prices are used in billion dollar transactions in a $2.5 trillion market.**

One such benchmark is the Brent crude oil price.  It’s the holy grail for Alberta oilsands producers and the reason why the Alberta government, to use a phrase that appears in each and every government press release, is fighting “to open new markets for Alberta’s resources”.  (Sidebar:  Ms Redford omitted  the “fighting” phrase in her press release congratulating the BC Liberals on their re-election;  she also omitted any mention of Liberal leader Christy Clark…hmmm.)

The Alberta government is convinced that once Keystone XL and Northern Gateway are approved oilsands crude will flow to new markets and the so-called “bitumen bubble”—the difference between the lower Western Canada Select price and the higher Brent crude price—will disappear.

But what happens if the European Commission investigation concludes that BP, Shell and Statoil colluded to artificially inflate the Brent crude oil benchmark and the benchmark price is no longer credible?  (The EC is alleging that the collusion has been going on since 2002 when oil traded at $20 a barrel; today it’s five times that price.)**

The fate of the Brent crude oil benchmark

Before we go there, remember this:  The Brent benchmark price is already slipping.  Analysts like Gene McGillian (Tradition Energy) don’t expect Brent prices to recover any time soon:  “Overall, the fundamental picture remains weak.  We’re at multi-decade highs in crude stockpiles, multi-decade highs in US production and that’s causing some resistance [to oil price increases].  As the market tries to push higher, that resistance is going to get stronger.”***

That “resistance” may explain why some oil companies are unable to sell their oilsands assets.  In the last two years Marathon, Murphy Oil, ConocoPhillips, Koch Industries, Shell and Athabasca Oil have put oil sands assets on the market but failed to sell them.  Last year $17 billion in oilsands assets languished on the market with no takers.****Imagine the impact on the marketplace if Platts, “the main price reference for the physical oil market”** is deemed to be untrustworthy.

Is the Alberta Government paying attention? 

By wrapping itself in the “bitumen bubble” the PC government has tied Alberta’s economic viability to the Brent crude oil benchmark price.  Consequently if the Brent benchmark collapses, the differential becomes irrelevant and Alberta goes deeper into debt.

The European Commission investigation will end in one of two ways: the process to set the Brent benchmark will be strengthened or the Brent benchmark will be replaced by a different international benchmark.  Until that happens the industry will be plagued with uncertainty, further hampering its ability to deliver 30% of the revenue stream that the PC government requires to fund healthcare, education, seniors care and infrastructure costs.

And that, my dears, is the result of the government’s “hope and a prayer” strategy—hope the price of oil goes up and the difference between the Western Canada Select price and the Brent benchmark goes down; and pray that Keystone and Northern Gateway are approved.  There is no Plan B.

I’d prefer a more robust strategy, wouldn’t you?    

*Globe and Mail Online, May 14, 2013   

**Reuters Online May 15, 2013

***Daily Oil Bulletin, May 8, 2013

****Calgary Herald, May 25, 2013, C1

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10 Responses to Will Platts Pop Alberta’s “Bitumen Bubble”?

  1. Carlos Beca says:

    PLATTS – I had never heard of them. Learned something new. It fascinates me that in today’s world we still rely on these agencies that can probably be easily manipulated by the big oil interestes.

    Plan B, what a luxury. I wished I could understand plan A never mind B. Do we have plan A anyway? I bet it is quite clear to the Conservatives, but not to me.

    At least on the weekend I got a little bit of sanity while listening to David Shindler on the Sunday Edition. I fully agree with him. I am just not sure why is it so complicated to understand David’s reasoning on the oil sands development, its consequences and why the pipelines are a bad idea. We could definitely make way more money developing these resources rather than just selling them as if we have no idea what to do with it. Here is the link.

    http://www.cbc.ca/thesundayedition/

    It is worth your time.

    • Carlos, thanks for the link to the David Schindler interview. It was excellent! The industry argues that it’s cheaper to upgrade these resources in refineries that already exist on the US gulf coast or in Asia than build our own upgraders here, but that places all the value on corporate profit (which benefits a few) and no value on the broader social interest in creating more energy jobs in Alberta, or indeed, diversifying our economy beyond energy. I’m not surprised that this is a corporation’s focus, but it shouldn’t be the government’s overriding focus. Even Jack Mintz, the well-respected U of C economist, in speaking out in favour of diversification says that Redford’s attack on postsecondary education is misguided. In his words, “The recent cutbacks and tuition fee freezes in post-secondary education are not the way to achieve diversification”. (Calgary Herald, May 23, A11). Makes you wonder who’s been advising the Premier and Ms Lukaszuk that this is the right path to future prosperity.

      • Carlos Beca says:

        Susan you are absolutely right as far as the interests of the corporations versus the citizens interests. This to me is the battle of the 21 century. Not the Christians versus Muslims like Ferguson predicts. You are right on the prediction game as well. I find it disturbing that after decades of this casino game, no one has stopped it. In economics they are right once out of 10 if so. Policies based on this statistic changes the lives of millions in most cases for the worse.

        The only way we are going to resolve this situation we are in now, not only in Alberta but around the developed world, is in my opinion very clear but not simple only because of the interests of the few.

        We have to have a total separation of business and government. We have to go back to economics for the benefit of people rather than the owners of the corporations. Governments have to be start making real decisions rather than the markets and money interests. Money supplies back in the hands of the central banks rather than private banks.

        This sounds extravagant but only because we have moved to far to the corporate interest side that we do not even remember that this was the model after the second world war and worked very well. This model did not allow elites and corporations to own palaces, private jets and have the total control of countries politics and imense fortunes , but that is wrong and should be fixed before we plunge into a similar situation before the first world war. We all know what happened after – the aristocracy and most of the monarchies that controled all the wealth like corporations and elites do today, basically disappeared. Some monarchs also lost their heads. This will happened again, this time the heads will not be monarchs for sure – they are destitute compared with the real rich today. 🙂

        By the way Susan, I believe that it is Lucaszuk who has been advising Alison 🙂 🙂

        Based on the quality of the decisions it has to be him. Who else is smart enough to come up with such far out ideas like drastically cuting Advanced Education budgets?

      • Carlos, you’ve identified the critical issue underlying the erosion of democracy here in Canada and elsewhere. Governments have been co-opted by the business sector and have lost sight of the fact that they’re supposed to represent all of the people, not just big corporate donors who are pushing their own business agendas. Having said that it’s remarkable how effective the environmental, First Nations, land owners groups have been with respect to the Keystone XL and Northern Gateway pipeline projects. Ten years ago these projects would have sailed through the regulatory process which, arguably, was even more rigorous than it is now. Of course the energy industry is just one small segment of corporate influence coming to bear on our politicians. One need only look at the concessions granted to Monsanto or the lack of rigorous regulation of the pharmaceutical industry to get a sense of how big this problem really is.
        I think we’ve reached the tipping point. The magnitude of the sacrifice (both in the reduction of social services and the exposure to increasing health and environmental risks) is becoming known on a broad scale. “Ordinary” people are getting worried and are starting to express their concerns louder than ever before. This is a good thing!

        PS Thank you Carlos for watching the Duffygate matter for us. That one simply boggles the mind!

  2. Elaine Fleming says:

    Thanks for this lesson on the wonderful world of Oil, Susan! It is really important to understand the who’s who, how’s and why’s of it all. (Although, ironically, having lived in this province my whole life, I have tried to avoid it as much as possible.) Now I finally know what the “Brent” is, and might be able to follow a conversation with that word in it. I might even try to tackle the business section of the paper!
    But, who was Brent, anyway?

    • You’re welcome Elaine. I’ve worked in the industry for decades. When I started it was quite intimidating–analysts and forecasters whipping out charts and graphs at every opportunity. Over time I realized that they invariably got it wrong because, guess what, no one can predict the future. Corporations always design their strategies with an eye to an optimistic future (no CEO wants to tell his board of directors that he underestimated how bad the market would get because he failed to see competition coming from the US). So it’s up to the government to be more realistic. It needs to design a revenue structure (including appropriate taxes and royalties) to support a population that’s growing by 100,000 a year instead of building our entire economic structure around the needs of the oil and gas industry.
      BTW: According to Wikipedia, the name “Brent” comes from Shell’s naming policy, which named all of its oil fields after birds–in this case the Brent Goose. It’s also an acronym for the layers in the oil field: Broom, Rannoch, Etieve, Ness and Tarbat. Cool, eh?

  3. carlosbeca says:

    I am sorry I meant ‘ This will happen again ……… and not This will happened ….
    and I do not drink, I just miss this stuff 🙂

  4. Carlos Beca says:

    How ironic – the prime minister that was going to reform our Senate, has created the biggest scandal ever at the Institution. Harper has done ZERO to reform either other than staff it with as many Conservatives as he can. The results are obvious.

  5. Carlos Beca says:

    Yes Susan the Duffygate boggles anyone’s mind. Like you, I tried to see the positives in it and I really found one very important one. Harper is not the person many Canadians thought he was. Many like me did not like at all the majority he got but at least I thought he was a principled man. I was wrong and I know that now for sure and this case cemented it. His ethics are the Conservative party ethics. I really think that he is overrated has prime minister and I bet that despite his Teflon characteristics he is going to pay for this one.

    I totally agree with you that we are at the tipping point and people seem to be finally awaking to this sad reality – the neo-conservative world is way worse than the Nanny era before it. The nanny state was finacially out of control for different reasons, this neo-consevative paradise bankrupted the world. Furthermore and taking in consideration that the present elites and major corporations will not change, it is in my books that we will see great distubances in the so called industrial world. After all we are not as special as we think we are and anger can take us a long way. Watch the video below and see what is already happening in the Greek parliament.

    http://www.washingtonpost.com/blogs/worldviews/wp/2013/05/17/disturbing-video-greek-member-of-parliament-shouts-heil-hitler-during-session/

    • Wow, that was quite a video, Carlos! I took a social anthropology course a long time ago. One of the things I learned was that when the economy starts to crumble and there’s not enough resources to go around, people will form distinctive social groups. These groups are usually stratified. The group that is second from the top doesn’t attack the top group (which controls the wealth and the army). It attacks the group just below it. Next comes civil unrest and upheaval. However this video shows the Golden Dawn shouting Heil Hitler and flaunting the authority of the group at the top. That’s a shift from what the social anthropologists predicted and very disturbing.

      PS Thanks for the link to the David Schindler interview. Well worth watching!

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